Paragon Offshore (NYSE:PGN) announced that it has reached an agreement with a group representing 77% of company's unsecured bondholders to exchange $984 million in bonds for $345 million in cash and a 35% stake in post-bankruptcy company. The company leveraged cash on the balance sheet to buy back bonds at 35 cents on the dollar. At this point in time, this is a win-win proposition for all parties involved, especially for unsecured bondholders since in a liquidation bankruptcy these would have been practically worthless.

But let's examine everything in its proper order. PGN reported its Q3 2015 results, which shows the following breakdown of company's debts.

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Total debt at the end of Q3 was $2.61 billion, of which $984 million was unsecured debt that is about to be taken at out 35 cents on the dollar. The company had $733 million in cash and part of this cash will be used to pay unsecured bondholders $345 million. Another portion of this cash, or namely $165 million will go toward paring down the balance on the revolver. The revolver itself will become a term-loan with an outstanding balance of $631 million, which includes $87 million in letters of credit, with maturity in 2021.

The new debt structure appears to be as follows:

New Term Loan

$631,000,000

Existing Term Loan

$639,000,000

Sale-Leaseback

$276,000,000

Total debt

$1,546,000,000

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I have subtracted estimated lease payments and regular principal payments due on the existing Term Loan to arrive at end of 2015 figures. Total debt now stands at approximately $1.55 billion. Net debt is probably around $1.1-1.2 billion depending how much cash was generated from operations in Q4 - 2015.

This deal in my view is great for unsecured bond owners because the fair value of bonds that are about to be exchanged for cash and 35% of equity stood at $150 million at the end of Q3. So, not only unsecured debt holders just saw a 120% increase in the value of their illiquid and mostly worthless paper. In a Chapter 7 liquidation scenario, PGN's assets would have been grossly insufficient to cover unsecured bondholders after paying back the revolver and the Term Loan.

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Not only bondholders got 35 cents on the dollar, but they also received some further upside should PGN actually survive and prosper if the cycle miraculously turns around quick enough.

PGN's equityholders are also benefiting at least in the short-term, especially considering that most analysts were certain equity is completely worthless. While it's tough to project what happens in the future, PGN bought itself some time by extending the maturity of the old revolver to 2021 and dropping restrictive covenants all the way until the first quarter of 2018. Despite shedding 40% of existing debt, remaining interest expenses will continue to act as a heavy drag on company's earnings going forward accounting for $80 million estimated annual cash outflow.

PGN needs to generate revenues in excess of $600 million per year to remain cash-flow neutral and preserve liquidity until industry cycle turns. I personally think that's a tall task, but a major obstacle has been lifted with the proposed restructuring.

Disclosure:I am/we are long PGN 2024 BONDS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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